Trump's win and the Fed's rate cut are giving the stock market an open road

MW Trump's win and the Fed's rate cut are giving the stock market an open road

By Lawrence G. McMillan

S&P 500 races ahead, and opportunities surface in solar power and crypto

The S&P 500 SPX has posted two consecutive new highs to confirm a breakout with no overhead resistance. From a technical outlook, the modified Bollinger Bands (mBB) have begun to expand; in particular, the +4<SIGMA> band is rising rapidly and is near 6,020. That band serves as a target of sorts for SPX, but it is a moving target.

One interesting thing on the SPX chart is that there is now an "island reversal" upward. It is circled on the chart below. SPX gapped down on Oct. 30, and gapped up on Nov. 6, leaving an "island" in its wake. This is a highly bullish formation which would only be negated if the gaps were to be closed by SPX trading down to 5,783.

There should be support at the S&P 500's old high (5,870) and in reality, since the index did so much work just below that level, the entire area between 5,670 and 5,870 represents support. It would be disappointing to see the index fall back below 5,870, and that would likely cause us to remove our "core" bullish position - but for now that position is intact.

The McMillan Volatility Band $(MVB.AU)$ buy signal of early August (green "B" on the SPX chart) remains in place. We have rolled the position up several times. Its target is also the +4<SIGMA> mBB.

Quite a few internal market indicators have changed since the election, but the equity-only put-call ratio has remained constant. Equity-only put-call ratios are on sell signals, as noted on the charts below. They have flattened out over the past couple of days, but the computer analysis programs we use continue to view these as bearish and expect them to move higher. As long as they are rising, that is bearish for stocks. What's happening here is that a lot of puts are still trading. We'll have to see if that changes as the U.S. presidential election moves farther into the rearview mirror.

Market breadth, on the other hand, has improved tremendously. It was already improving before Election Day and has since exploded in a positive way. So, the breadth oscillator sell signals have been reversed, and the oscillators are now on buy signals once again. These are "true" buy signals in the sense that the oscillators dipped into oversold territory before turning back upwards.

New highs on the NYSE continue to outpace new lows, so this indicator's buy signal - originally registered back in August - remains in place. There was one day this past week where new highs and new lows were equal, but the post-election trading saw more than 400 new highs. That's a huge number, and it is extremely bullish.

Perhaps the greatest change, post-election, has taken place in the volatility space. The SPX options that were expiring just after the election have been expensive all year long. That is no longer the case, as their implied volatility plunged in the wake of the early undisputed presidential election results. By early, I mean that we didn't have to wait days or weeks for recounts and challenges.

All of the CBOE volatility indices were using these expensive options in their calculations, so these indices have dropped sharply. VIX VIX gapped down by a large amount, and that establishes and new "spike peak" buy signal. This signal will remain in effect for 22 trading days and would only be stopped out if VIX were to rise and close above its previous peak at 23.42.

In addition, the trend of VIX sell signal, which has been in place for a long time may finally be about ready to be stopped out. If VIX were to close below its 200-day moving average $(MA)$ for two consecutive days. That 200-day MA is at 15.80 and rising steadily.

Meanwhile, the VIX futures have fallen back into a more normal, bullish construct. The front-month November VIX futures are still slightly elevated, but the others are now sloping upwards in a modestly-rising term structure. That is a much more bullish picture than we saw prior to the election, although it is not nearly as bullish as one might expect.

In summary, we are maintaining our "core" bullish position. We will add new positions around that "core" and are prepared to roll deeply in-the-money calls upward.

New recommendation: VIX "spike peak" buy signal

As noted above, there is a new VIX "spike peak" buy signal. While it may not be an optimal entry point because the market has already moved so much higher, these signals cannot be ignored.

Buy 1 SPY (Dec. 20) at-the-money call and Sell 1 SPY (Dec. 20) call with a striking price 20 points higher.

NOTE: if there is no strike exactly 20 points higher, then use the next highest strike. Example: With SPX at 593, one would buy the SPY SPY (Dec. 20) 593 call, but there is no Dec. 20 call with a 613 strike, so use the 615 strike instead.

This position will be held for 22 trading days - or until early December. It would be stopped out if VIX were to rise and close above its most recent peak at 23.42.

Market insight: Election observations

Donald Trump's election caused some major reactions in several areas of the market. Two affected sectors in particular are solar power and bitcoin (BTCUSD).

In terms of bitcoin, besides the price of the cryptocurrency itself, we saw massive moves in crypto-related stocks. Coinbase Global $(COIN)$ and its covered call writing ETF CONY both moved sharply higher. MicroStrategy $(MSTR)$ - which carries a large bitcoin position - and its covered call writing ETF MSTY) exploded as well. MSTY is near resistance, and if it can break out over that, it should be able to move higher.

Conditional call buy in MSTY: If MSTY closes above $31.40, then buy 3 MSTY (Dec. 20) 31 calls in line with the market.

Solar power had the opposite reaction. The sector has been in a decline since peaking last June. But there was a sharp rally in solar stocks just prior to the election, only to see them turn and gap lower after the results. It seems to me that the post-election selling is overdone - Enphase Energy (ENPH) and First Solar $(FSLR)$ were especially hard-hit. If there is to be a rebound in the sector, it is probably easiest to own the Invesco Solar ETF TAN.

Buy 3 TAN (Dec. 20) 37 calls in line with the market.

Stop out of these calls if TAN closes below $35.50.

Follow-up action:

All stops are mental closing stops unless otherwise noted.

We are using a standard rolling procedure for our SPY spreads: In any vertical bull or bear spread, if the underlying hits the short strike, then roll the entire spread. That would be roll up in the case of a call bull spread or roll down in the case of a bear put spread. Stay in the same expiration and keep the distance between the strikes the same unless otherwise instructed.

Long 1 SPY (Nov. 22) 560 put: This position is based on the trend of VIX sell signal and would be stopped out if VIX closes below its 200-day MA for two consecutive days.

Long 1 SPY (Nov. 15) 584 call and short 1 SPY (Nov. 15) 605 call: This position is based on the new highs vs. new lows buy signal. It was entered via a bull spread bought at the close of trading on Aug. 15. It was then rolled up twice. It would be stopped out if, on the NYSE, new lows outnumber new highs for two consecutive days.

Long 1 ABNB (Nov. 15) 135 call: Roll up to the ABNB $(ABNB)$ (Nov. 15) 142 call. Also, raise the closing stop to 134.

Long 1 SPY (Nov. 15) 584 call and short 1 SPY (Nov. 15) 605 call: This is our core bullish position. Stop out of the position if SPX closes below 5,670 for two consecutive days.

Long 2 PLD (Nov. 15) 115 puts: We will continue to hold PLD $(PLD)$ puts as long as the put-call ratio remains on a sell signal.

Long 4 LX (Nov. 15) 2.5 calls: Raise the stop and stop out on a close below 3.15 by LX $(LX)$.

Long 0 SPY (Nov. 15) 584 call and Short 1 SPY (Nov. 15) 601 call: This position is based on the VIX "spike peak" buy signal of Oct. 14. It was stopped out on Oct. 31, when VIX closed at 23.16. A new "spike peak" buy signal is now if effect (see recommendation above).

Long 2 CLX (Nov. 15) 160 puts: This position will remain in place as long as the weighted put-call ratio of CLX $(CLX)$ remains on a sell signal.

Long 4 WBA $(WBA)$ (Nov. 29) 9.5 calls: This is the "alternative" Dogs of the Dow position. Hold without a stop at this time.

Long 2 APH (Jan. 17) 62.5 calls: We will hold these calls as long as the weighted put-call ratio for APH $(APH)$ remains on a buy signal.

Long 1 BLDR (Nov. 15) 170 put: We have rolled down twice. We will hold this BLDR $(BLDR)$ put as long as the put-call ratio sell signal remains in effect.

Long 1 SPY (Nov. 15) 578 put and Short 1 SPY (Nov. 15) 548 put: This position should be sold, since the breadth oscillators are no longer on sell signals.

Long 1 SPY (Dec. 20) 597 call, short 1 SPY (Nov. 15) 597 call; long 1 SPY (Dec. 20) 559 put, short 1 SPY (Nov. 15) 559 put: This the dual calendar spread that we established in order to take advantage of a post-U.S. election drop in volatility. We had said, "After the election, exit the spread if SPY trades exactly at either 597 or trades at 559 at any time." SPY has not quite made it to 597 yet, but the position is marking up slightly, so exit at this time.

CTSH: We had made a conditional recommendation to buy CTSH $(CTSH)$ puts. That recommendation is now canceled.

All stops are mental closing stops unless otherwise noted.

Send questions to: lmcmillan@optionstrategist.com.

Lawrence G. McMillan is president of McMillan Analysis, a registered investment and commodity trading advisor. McMillan may hold positions in securities recommended in this report, both personally and in client accounts. He is an experienced trader and money manager and is the author of "Options As A Strategic Investment". www.optionstrategist.com

Disclaimer:

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